FMHQ (Friday Morning Housing Quant)

Takeaway:Housing stocks bounced notably in the latest week, but continue to modestly lag the market more broadly.

Our FMHQ (Friday Morning Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume.

Takeaways:

Performance Roundup: Housing resumed its normal 4Q seasonal momentum in the latest week with the average builder up 3.0% on the week vs the S&P 500 rising 1.7%. This brings the QTD performance back into solidly green territory. QTD absolute returns for ITB and XHB stand at +7.2% and +5.0% vs the S&P 500 +8.4%. Meanwhile, the average builder from our tables below is now +2.1% QTD. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +8.4%, +5.1%, +6.2%, Unch'd QTD, respectively. The three best performing builders thus far this quarter are DHI (+9.2%), NVR (+8.4%) and TOL (+8.1%), while the three worst performing builders are TMHC (-10.5%), HOV (-5.1%), and MTH (-3.1%).

Insider Buying: Other than the Director at Hovnanian (HOV) who purchased 20k shares (~$45k) in late October, there's been no recent insider buying in the sector.

Beta: The highest beta names (1YR) remain HOV (1.52), KBH and BZH which are at 1.33 and 1.36, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.61), MDC (0.93) and TOL (1.00).

Short Interest:CAA, KBH and DHI have seen SI creep higher, rising as a % of SO by 5.0%, 4.2% and 1.5%, respectively in the latest month. TMHC, HOV & MTH have seen SI fall by 2.3%, 2.0% and 1.8%, respectively.

Valuation: The cheapest names in the group currently are BZH (7.5x), MTH (9.6x) and TMHC (9.2x), while the most expensive are NVR (15.2x), LEN (13.3x), and TOL (13.6x). Incidentally, NVR, at 5.3x TBV, is currently at 99% of its peak 5-year valuation.

Joshua Steiner, CFA

Christian B. Drake

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11/20/15 11:12 AM EST

HEDGEYE Exchange Tracker | Options Have Their Most Active Week of the Quarter

Takeaway:The 4Q15TD options ADV rose to 16.9 million from 16.5 million in the previous week, making for a +200 bps improvement in the Y/Y rate.

Weekly Activity Wrap Up

The 4Q15TD average daily volume for cash equities and options rose this week with options having their strongest week of the 4th quarter to date. Cash equities averaged 7.21 billion shares per day, bringing the quarter's average to 7.16 billion marking +2% Y/Y growth from 4Q14. Options activity rocketed during the week putting up an average of 19.5 million contracts per day, blending the quarter-to-date average to a 16.9 million ADV, now only -2% lower Y/Y versus the -4% comp last week. Futures activity (both CME and ICE) continues to burn off the tough 4Q14 comp which included the Grexit, with the 17.8 million contracts per day this week blending to 18.0 million for 4Q15 to date. This Y/Y activity change remains at -6%. Most importantly Y/Y open interest is up +14% at CME and +17% at ICE which will drag trading volume through to higher levels into 2016.

U.S. Cash Equity Detail

U.S. cash equity trading came in at 7.2 billion shares traded per day this week. That brings the fourth quarter average to 7.2 billion shares traded per day, a +2% Y/Y expansion but -2% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +2% year-over-year increase, while NASDAQ is taking an 18% share, a -10% year-over-year decline.

U.S. Options Detail

U.S. options had their best week of the quarter so far. Activity came in at a 19.5 million ADV this week, bringing the 4Q15TD average to 16.9 million, a -2% Y/Y and -7% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -6% of its share year-over-year settling at just 19% of options trading currently. Additionally, CBOE's market share sits at 26%, -16% lower than 4Q14. NASDAQ, on the other hand, has increased its market share by +15% compared to 3Q15, bringing itself only -1% lower than the 24% share it held a year ago. Additionally, BATS' 8% share of 4Q15TD volume is +29% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +6% Y/Y growth.

U.S. Futures Detail

CME Group activity came in at 13.2 million contracts traded per day, bringing the 4Q15TD average to 13.2 million, a -11% Y/Y and -8% Q/Q contraction. CME open interest, the most important beacon of forward activity, currently tallies 106.5 million CME contracts pending, good for +14% growth over the 93.7 million pending at the end of 4Q14, consistent with the prior week.

ICE saw volume of 4.6 million contracts traded per day this week, bringing 4Q15TD ADV to 4.9 million, +11% Y/Y and +14% Q/Q growth. ICE open interest this week tallied 69.4 million contracts, a +17% expansion versus the 59.4 million contracts open at the end of 4Q14, an improvement from last week's +15%.

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

Earlier this morning, ECB President Mario "Whatever It Takes" Draghi warned as much in a speech delivered in Frankfurt. To be precise, Draghi said "We will do what we must to raise inflation as quickly as possible." He then added that "Low core inflation is not something we can be relaxed about."

What may not be appreciated, however, is that Draghi is actually perpetuating deflation, in currencies and commodities.

Here's Hedgeye CEO Keith McCullough's dissection of Draghi's comments, and the resulting effects on USD and oil, in a note to subscribers following the news:

"Draghi saying the ECB “cannot be relaxed” about fighting #Deflation – so, he’s devaluing the Euro again this morning, -0.5% to $1.06 vs. USD, reversing what was a Dollar Down day yesterday (in other words, he’s perpetuating commodity #deflation)

Oil, meanwhile, islooking to snap $40 WTI again as the Dollar ramps on “whatever it takes” to try to bend/smooth economic gravity - you can expect that most OCT “reflation” data is going to mean revert to bearish TREND here in NOV as commodities crash."

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HEDGEYE'S EARLY LOOK | REFORMAGEDDON COMETH!

"Everybody talks about the weather, but nobody does anything about it."

-Mark Twain

I have been chirping about the #ACATaper for several months now with a small but growing audience of subscribers who are starting to ask more questions about our research as the evidence mounts and stock prices in the healthcare space get hammered.

I say chirping because a chirp is hard to hear, and to a lesser extent, the person chirping is usually beating you. If you have played sports, you know what I mean. If you have an older brother who beat you at whiffle ball absolutely every single time you played and called it “The Streak,” I understand your pain completely.

It is no fun to be chirped, and it’s not my style. Good research is usually quiet, and “getting loud” is anathema to a process, at least a good one, that generates more questions than answers. So far we’ve shared our research most comprehensively in our recent Healthcare Themes Presentation.

The #ACATaper theme suggests that after the U.S. Medical Economy experienced the largest inflow of new medical consumers (35 million) in the last 30 years, and who carried with them above normal per capita spending resulting in more than $120B of new money being pumped into the system in a mere 18 months, the what-comes-after will likely be equally epic on the downside.

To put the ACA enrollment expansion into context, the next best year for increases in the number of insured medical consumers occurred in 1996 when the United States added 3.2M people to the insured population. The United States just added 10 times that number in just 18 months! Nothing in recent history even comes close.

What will happen next, in our view, is the enrollment gains of 2014-2015 are now convincingly behind us, and heading for declines in 2016. Those 35 million new medical consumers, who had been chronically uninsured prior to the ACA and had a lot of things to take care of medically, will be spending much less per person in 2016 and beyond. What the ACA has created is a comparison so big that it will likely be violent as it unwinds and might make “taper” look like too gentle a term in retrospect. The #ACATaper may mutate into #REFORMAGEDDON.

If we’re right, we’re not just leaving it up to management teams for the heads up when they speak at a conference or report earnings, like HCA did when they preannounced negative for 3Q15 (down -31%) , or like UNH did yesterday when they also pre-announced negative(down -12%). In HCA’s case, they overstaffed their hospitals for volume that didn’t show up. That agrees with the #ACATaper, which anticipates pent-up demand to roll off in the coming quarters and the ACA consumption contribution to turn negative.

UNH said the same thing but on a lag and in reverse. They announced that their ACA Exchange enrollment was going to cost +$425M more than expected for their 540,000 exchange enrollees. That is $773 per enrollee more than expected, with the true expense likely higher since presumably these losses came after the ameliorating forces of risk adjustment, reinsurance, and risk corridors which the ACA put into place to smooth this new market’s emergence. These two stalwarts of the S&P 500 did not see this coming.

The #ACATaper appears to be happening fast as well. Just compare what UNH said on their 3Q15 earnings call on October 15, 2015 to what they said yesterday on November 18, 2015 when they pre-announced and guided down.

“We will expand to 11 new markets in 2016 and we continue to expect exchanges to develop and mature over time into a strong,viable growth market for us. -David Scott Wichmann President & Chief Financial Officer, UNH 3Q15 Earnings Call

Compare that rosy picture to what UNH communicated in their press release yesterday…

“UnitedHealthcare has pulled back on its marketing efforts for individual exchange products in 2016. The Company is evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017” (UNH 2015 earnings update)

We have our high frequency data sets that will keep us alert to the #ACATaper trend. We prefer predictive, high frequency data check-ups with a few anecdotes mixed in, as oppose to waiting for management to tell us what happened.

The Great Healthcare Deflation

After the #ACATaper, the prospects for the US Medical Economy do not appear any brighter in 2017 or 2018, at least not for the vast majority of publicly traded market capitalization available to investors today. Consider the following demographic trends:

The U.S. workforce and their commercial insurance, the most profitable part of the US Medical Economy, will enter a long period of population growth stagnation, remaining at 190M for the next decade.

The workforce will get younger too on average, and consume less per capita, as the bolus of Millennials displace the Gen-X generation.

Meanwhile, the Baby Boomers will graduate into Medicare at a faster rate than Medicare spending is forecast to grow, and push growth of real spending per Medicare beneficiary negative.

These demographic trends will occur with affordability nearing its natural limits. Premiums are nearing the peak for individual out of pocket expense, employer premium contribution, and state and federal budgets for Medicaid and Medicare.

But people will get sick in the future and the population will consume more medical care; they will show up to the doctor office, pharmacy, and hospital regardless of the fiscal backdrop. However, when they do make that appointment, the price paid and profit available for those units of care will almost certainly be lower than today, resulting in a secular decline.

The great hope I have for the U.S. Medical Economy is that I will see a massive turnover in the healthcare market capitalization now included in the S&P 500 Index, and witness the emergence of new delivery models, new products, new technology, that makes the system more price transparent and more efficient. The problem for now is much of this innovation is sequestered out of sight in the world of private investment and venture capital, or yet to be developed at all.

We’ve had 50 years of excess inflation in healthcare, a trend so long in the making that it seems like it can never end, but it will end because there simply isn’t another alternative. There was a time when a knee implant with $70 of material costs could be sold for $7000, but those days are over.

Of course, the transition will be painful, and has only just begun, but it does hold the promise of renewal. My hope is if the policy and capital stewards of the U.S. Medical Economy can manage it, we will have deflating prices, less waste, better care, and the perpetual Healthcare Crisis we’ve come to expect will turn into the Healthcare Opportunity.

If it happens, it will be a great source of strength for individuals and their medical security, their employers who will have more to reinvest, and for our country if we can stick the landing.

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